Market Commentary 26th August 2025 – from Naigil Johnson

The Consumer Prices Index (CPI) showed the annual inflation rate in the UK rose to 3.8% in July 2025, its highest level since January 2024 and above market expectations of 3.7%. The increase was primarily driven by higher transport costs, including a sharp rise in airfares, while the prices of many essential food items also continued to climb. The renewed inflationary pressure appeared to raise concerns that persistent price growth may limit the Bank of England’s ability to cut interest rates further. With the UK Autumn Budget approaching, investors seemed to remain cautious, as any additional tax changes could further strain household and business costs in an already inflationary environment.

UK manufacturing activity contracted at a faster pace in August, reflecting ongoing weakness in new orders and heightened competitive pressures. Firms cited subdued global demand, with uncertainty around US tariffs further weighing on performance. In contrast, the UK services sector continued to expand, with business activity rising for the fourth consecutive month. Growth accelerated to its strongest pace in a year, supported by a renewed increase in new orders, suggesting ongoing resilience in the sector despite broader economic headwinds.

Germany’s economy contracted 0.3% quarter on quarter (QOQ) in Q2 2025. This was sharper than the initial estimate and marked the largest quarterly decline in a year. The downturn was driven by a significant drop in fixed capital formation, highlighting weaker investment in construction, machinery, and vehicles.

Germany’s Purchasing Managers’ Index (PMI) data showed that manufacturing activity edged closer to stabilisation, reaching its highest level since mid-2022. Meanwhile, the services sector registered near-stagnant growth, with a marginal decline in new business dampening recent momentum.

In France, both manufacturing and services sectors showed improvement, with PMI figures suggesting both areas are heading toward expansionary territory. Manufacturing activity rose to its strongest level since early 2023, though the sector seemed to continue to face challenges from weakened international competitiveness and trade uncertainty linked to US tariffs. The services sector also moved closer to stabilisation, with output declining at a slower pace and reaching its highest reading in a year. These improvements supported market sentiment, which appeared to contribute to the broader strength in French equities.

Federal Reserve Chair Jerome Powell struck a cautious but notably more dovish tone in his speech last Friday, indicating that an interest-rate cut is likely at the Fed’s September meeting. Powell noted that “the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance”. In line with these shifting dynamics, Powell also revealed that the Fed has moved away from its previous framework of targeting average inflation of 2% over time and from assessing employment based solely on shortfalls from maximum levels, which appeared to suggest a more flexible and risk-aware policy approach going forward.

Regarding the economic data, the S&P Global US Manufacturing PMI rebounded strongly to signal renewed expansion after July’s contraction, while the Services PMI remained firmly in expansionary territory despite a slight dip from the previous month. Both indicators exceeded market expectations, pointing to continued momentum in the private sector. Initial jobless claims, however, rose by 11,000 in mid-August to 235,000. This was the sharpest weekly increase in two months and appeared to suggest the emerging cracks in the labour market. 

Chinese equities continued their upward momentum last week, with the Shanghai Composite Index rising strongly. The rally was supported by easing trade tensions with the US and an extension of the tariff truce, which, combined with ample household savings, encouraged a shift by local investors from bonds into equities. The surge appeared to reflect rising optimism among retail investors, who seemed increasingly confident in the market’s near-term prospects.

Japan’s annual inflation rate eased to 3.1% in July, its lowest level since late 2024, driven by falling electricity prices and continued declines in education costs. The S&P Global Japan Manufacturing PMI showed signs of improvement, rising close to expansion. However, it still signalled contraction, with overall sales continuing to fall amid the impact of new US tariffs. Meanwhile, the Services PMI remained in expansionary territory for a fifth straight month, though the pace of growth slowed. The sector’s resilience was underpinned by domestic demand, even as overseas orders weakened.

GBP / EUR – Current 1.1545 Previous 1.1581

The Pound slipped 0.21% against the US Dollar last week and weakened 0.31% against the Euro. Although recent positive economic data have supported Sterling in the past few weeks, growing uncertainty surrounding the upcoming UK autumn budget announcement has led analysts to remain cautious, which appeared to put downward pressure on the currency.